The Ledger Domain

Salary Arbitration Beats Free Agency

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"Honestly? What's to like about it?"
-Anonymous MLB executive, on the subject of salary arbitration

With a recession now in full bloom, it's clear that the league and its owners are touting the fiscal responsibility card whenever possible. Free agency, once a sure-fire ticket to hefty salary increases, has gone as cold as an April game at Coors Field. Take the example of Pat Burrell, who made $14.25 million last year with the Phillies, and then had to settle for two-year, $16 million deal with the Rays this offseason. Bobby Abreu was reportedly seeking a three-year, $48 million deal in free agency, and instead settled for a one-year, $5 million pact with the Angels that, with incentives, could go as high as $6 million.

Even so, this year more money is going to young players that have reached salary arbitration eligibility than ever before. In some cases, salary increases have been stratospheric (check this out for more on salary arbitration eligibility). Based on an extensive study from January 15th, the deadline for filing, to February 20th, the final day of arbitration hearings (see the 25-page report here) by nature of the process the 111 players in this year's salary arbitration class received a steep increase in salaries, and not the declines we have been seeing in free agency.

The total combined 2008 salaries for the 111 players that filed for salary arbitration in this year's class was $122,947,513. After reaching contracts, these players will see a combined salary figure of $298,891,250 for 2009, or an increase of 143 percent. The increase is up from last year's 120 percent increase. It should be noted that The Associated Press has reported that the increase for this year's class is a record-setting 172 percent from last year, but this is somewhat misleading. The AP used annual average value for the multi-year contracts in this year's group of players, whereas the study for this article uses the 2009 base salary within the contract agreements. How does AAV skew the figures? Instead of the $6 million that Kevin Youkilis will receive this season, AAV shows his salary as $10.25 million based on his four-year, $41 million deal.

When factoring in the 15 multi-year contracts from this year's class of salary arb players, nearly $590 million ($580,816,250) in salaries were reached during the 2009 salary arbitration process. Looking at it another way, as of February 24, $1,100,007,500 has been spent in total on 101 free agents, with 40 percent ($441,000,000) of that total consisting of this winter's hefty Yankee contracts. Remove the Yankees from the mix and you wind up with $659,007,500, or a shade over $78 million more than was spent on salary arbitration this year.

Per the salary arbitration process, if players and clubs do not reach an agreement by a designated date on the calendar, the sides exchange salary figures with the player presenting an asking figure while the club presents an offering figure. This year, the filing date for this process was January 20th, with 46 players exchanging figures with their respective clubs. In another sign that players in salary arbitration continue to see hefty increases each year as the salary arbitration market continues to climb, the average salary for the 48 players that exchanged figures as part of last year's salary arbitration class was $2,839,063. This year's class of 46 exchange players sees an average salary of $3,011,638 for the 2009, an increase of six percent from the year prior.

On the arbitration hearing front, of the 46 players that exchanged salary figures with their employers, only three cases were ruled on by a panel of arbitrators, the lowest number of cases since 2005, when Kyle Lohse, Jeremy Affeldt, and Juan Cruz had decisions rendered. This year, the players beat the clubs two decisions to one in their hearings, with pitcher Shawn Hill of the Nationals and second baseman Dan Uggla of the Marlins winning their cases, while catcher Dioner Navarro of the Rays lost his. As a result, this year marks the first year since 1996 that the owners will not have a winning record in hearings. That year, seven players (Steve Avery, Jeff Fassero, Chuck Knoblauch, Mark Lewis, Mike Stanton, Rick Wilkins, and Bernie Williams) won their cases, while three players (Willie Banks, Arthur Rhodes, and Ivan Rodriguez) lost. Of the 487 salary arbitration cases that have been heard since the process was collectively bargained into MLB in 1974, the owners have now won 280 (57 percent) to the players' 207 victories (43 percent) in the cases heard. More fundamentally, every one of the 111 players in this year's class received an increase in salary, ranging from a low of three percent (Jimmy Gobble of the Royals, and Jason Repko of the Dodgers), to Dan Uggla's salary increase of 1183 percent from 2008 to 2009.

While it is difficult to ascertain exactly how clubs approach player contracts with those that reach agreements before salary figures are exchanged, we can get a good idea of how they approach the process by looking at the deals reached with those players that do exchange figures. To offer up a psychological win for the clubs, contract agreements almost always come in below the mid-point figure, the figure in between the asking figure by the player and the offering figure by the club, for the upcoming season, thus saving the owners a bit of cash. This year, eight deals came in above the mid-point, to the advantage of the respective players, with two of those players (Uggla and Hill) seeing increases due to their winning their arbitration cases. All told, the 29 clubs in arbitration saved $6.905 million in 2009 by brokering deals below the mid-point.

Beasts of Burden: The club that had the biggest burden in this year's class was the Phillies. With the confetti from their World Series Championship still being kicked around, the club began the difficult process of coming to agreements with eight salary arbitration-eligible players: Greg Dobbs, Chad Durbin, Ryan Madson, Jayson Werth, Shane Victorino, Cole Hamels, Joe Blanton, and Ryan Howard. The Phillies' task was even greater having Hamels, the NLCS and World Series MVP, and Howard, who had led the league in home runs (48) and RBI (146) in the mix. Howard won his salary arbitration case with the Phillies last year, and was awarded $10 million; the highest salary ever awarded a first-time salary arbitration-eligible player. The Phillies had never lost a salary arbitration hearing until that case, and they seemed to wish to avoid it happening again. Howard agreed to a three-year, $54 million deal, the second-highest contract among arb-eligibles behind the Orioles' Nick Markakis, who landed a six-year, $66.1 million deal. Howard will receive a $15 million salary this year, a 50 percent increase from his $10 million salary last season. Howard's 2009 salary is an eye-popping increase of 1567 percent from his $900,000 salary in 2007.

For Hamels, he raked in a three-year, $20.5 million deal, the sixth-highest contract total out of the 111 men who filed for salary arbitration this year. As a "super two" player (his major league service time was two years and 143 days), Hamels will earn $4.35 million this year, a 770 percent increase from his $500,000 salary last year.

Those were just the big items on the agenda for the Phillies, but there were the others as well. To limit the mounting pile of potential salary arbitration deals that they would have to endure in coming years, the Phillies struck four of the fifteen multi-year contracts doled out in this year's salary arbitration cycle by adding those of Gregg Dobbs (two years, $2.5 million), Ryan Madson (three years, $12 million), and Jayson Werth (two years, $10 million) to the Howard and Hamels deals. All told, the Phillies will pay out $35.735 million to these eight players this year, and a total of $109,235,000 when throwing in the multi-year contracts.

The Big Winners (multi-year contracts): As noted, in terms of multi-year contracts, Nick Markakis got the biggest payday by reaching a six-year, $66.1 million deal with the Orioles. If we use AAV to see who garnered the most based upon the number of years in the contract, Ryan Howard wins with his three-year, $54 million deal, or an AAV of $18 million. The other big winner in terms of multi-year contracts is Zack Greinke of the Royals, who landed a four-year, $38 million agreement, or a $9.5 million AAV.

The Big Winners (increase from 2008 to 2009): When it comes to getting the biggest raise from 2008 to this coming season, Uggla obviously smashes the competition. By winning his salary arbitration case with the Marlins, Uggla will earn his asking figure of $5.35 million this year, an 1183 percent increase from his $417,000 salary last year. Looking at that raise another way, his 2009 salary is over 12 times as much as his 2008 salary. Other players seeing that kind of increase from 2008 to this coming season include Brewers first baseman Prince Fielder ($6.5 million, and 870 percent increase from his $670,000 salary in 2008), Cardinals outfielder Ryan Ludwick ($3.7 million, 779 percent better than his $421,000 salary last season), and Angels starter Ervin Santana ($3.8 million, or 754 percent more than his $445,000 salary last season).

The Smartest Guys in the Room: Veteran relievers David Weathers of the Reds and Darren Oliver of the Angels either completely lucked out or were crazy as foxes this year. In the past, going the route of free agency has landed the biggest payday, but as noted this year is not like any other in the recent past. With spring training underway, 46 free-agent players are still listed as unsigned. A total of 24 free agents were offered salary arbitration by their clubs in the 2008-09 offseason; twenty-two of the players went the route of free agency, while Weathers and Oliver chose salary arbitration. So, instead of the two possibly sitting on the sidelines looking for work, Weathers saw his salary increase from $3.3 million last season to $3.5 million this year, an increase of six percent, while Oliver's salary increased from $2 million last year to $3.665 million in 2009, an increase of 83 percent. Like I said, smart.

The Biggest Losers: From my perspective, this one collectively goes to the owners. As the quote at the beginning of this article points out, there's not much to like for them, as I think the process is skewed completely toward the players. "When you think about it, it's like a secondary tier for the minimum salary," said one long time executive. "It's a way of life, but that doesn't mean I have to like it," said another. "The player wins, even if we win. And even then, the process of hearings can build tension between us and the player."

Maury Brown is an author of Baseball Prospectus. Click here to see Maury's other articles.
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“It’s a way of life, but that doesn’t mean I have to like it,” said another (long-time exec). “The player wins, even if we win."

By "winning," this exec means the player earns something much closer to what he would in a free-market situation instead of the artificially and significantly deflated salary he receives in his first three seasons.

Not that I'd ever complain about a $400k salary, but in the salary structure of baseball, pre-arb players are often grossly underpaid.

Looking at the data, 51 players in this year's arb class earned between $380K (last year's minimum salary) and $500k, or 46 percent of the 111 players that filed.

For fun, I went back and flipped through John Helyar's seminal book, "Lords of the Realm" to see how the owners reacted to salary arbitration coming into the mix back in 1973 went over.

Before 1973, players were offered a contract by the clubs they played for, and it was a matter of “take it, or leave it.” In an attempt to challenge the Reserve Clause, as well as leverage higher salaries in this system, players began conducting holdouts on contract renewals. The owners, and then commissioner Bowie Kuhn, realizing the wolves were at the door, opted to allow salary arbitration as a way of stopping the holdouts, and rationalized that in the long run, stop free agency. Only Charlie Finley of the A’s and Dick Meyers of the Cardinals voted in opposition of salary arbitration.

“We’ll be the nation’s biggest assholes if we do this,” Finley said at the time. “You can’t win. You’ll have guys with no baseball background setting salaries. You’ll have a system that drives up the average salary every year. Give them anything they want, but don’t give them [salary] arbitration.”

Meyers, who had experience in arbitration, said it more darkly, “This will be baseball’s ruin.”

Arbitration is what it is. Teams have an enormous investment in players; many who are never productive. Teams use the suppressed wages of the first two years to help cover the overall cost of player development. The arbitration process sucks, but is there a better way?? Don't know.